Bitcoin rally was so huge it was worth the risk-adjusted twists

Yes, you made a bundle holding Bitcoin through the top a month ago. And even with a selloff like this one, it’s probably been worth the toll on your nerves.

With the cryptocurrency sinking as much as 31% Wednesday, one might ask whether the token has been a good investment over time. As scary as the sudden wipeout is, the gains have been so enormous that -- even adjusted for risk -- Bitcoin has done way better than other major assets.

Consider its trajectory since the end of last September, when Bitcoin embarked on a meteoric rise. Over the span, it has generated a 255% return, a rally that few other investments can match. At the same time, its price swings have also been almost unparalleled -- 11 separate sessions of intraday losses of at least 10%.


But anyone who has stomached the churn is reaping a benefit. When adjusted for daily volatility, Bitcoin’s return since September has been more than twice that of the S&P 500 Index and easily trounced a negative reading for Treasury bonds. Commodities also fared worse over the stretch.

“In spite of the volatility, BTC’s returns have more than made up for it,” said Stephane Ouellette, chief executive and co-founder of FRNT Financial. “We’re talking about the greatest bull market for the asset ever.”

Of course, the exercise is a limp defense if you’re looking at losses of more than 40% from the top. Bulls tout its use for diversification against inflation while skeptics question everything from its energy use to the regulatory risk. If anything, the performance data is a lens into the psychology of the HODL crowd who have been piling into the asset despite frequent busts like Wednesday’s.

Bitcoin pared losses to 15% as of 12:12 a.m. in New York after Tesla’s CEO Elon Musk tweeted that the company has “diamond hands,” using emoticons to spell out the phrase.

The risk-adjusted return is calculated by dividing total return by volatility, or the degree of daily price variation. The measure, which isn’t annualized, is designed to show performance per unit of risk.

Viewed from a wider lens since 2010, Bitcoin’s risk-adjusted return showed similar outperformance relative to other assets. The same holds true for a variety of time periods -- the start of 2020 or 2015 -- that capture its most recent rally. Periods in which it doesn’t hold true include using a starting point in 2017, when the coin tumbled 80% from peak to trough.

Still, Chris Grisanti, chief equity strategist at MAI Capital Management, said that it’s difficult to determine whether Bitcoin is truly a superior investment.

“When you compare it to commodities, when you compare it to stocks, you have more than a century of data for the others and for Bitcoin you don’t,” said Grisanti. “There haven’t been enough different investing environments for Bitcoin as there have been for other asset classes.”

Interest in digital assets has picked up in recent months as more traditional firms who were long hesitant to the crypto space warmed up to cryptocurrencies. But many others are reluctant to embrace the asset due to its heightened volatility.

“Look, what people fail to understand is the newness of digital assets,” Julian Emanuel, chief equity and derivatives strategist at BTIG, said on Bloomberg TV. “You just have to understand that with the evolution of this technology -- and it really is as much about the technology as anything else -- you’re just going to have immense amounts of volatility.